Beware Debt, the Ghost of Christmas Spending
The Christmas shopping season officially begins this week. For many consumers, that means trouble.
Already overextended with credit card borrowing and other debt, too many consumers spend way beyond their means during the holidays. When January rolls around, they’re left with a hangover of unpaid bills and unhappy creditors.
Christmas spending sprees “will often be the final straw that hits people” already in the debt doghouse, says Gary Stroth, executive director of the Consumer Credit Counseling Service of Los Angeles, a nonprofit agency that helps people with debt problems. The agency’s busiest season for overextended consumers is January, February and March, “once all the Christmas bills arrive,” Stroth says.
Avoiding a debt disaster is especially important now, as the economy flirts with a recession that could threaten your job, pay raise or investments. Here are some common-sense tips on avoiding post-holiday financial blues:
* Make a budget and stick to it.
Figure out how much you can reasonably afford to spend. One way is by listing your income from wages and investments, and then subtracting your regular minimum monthly expenses, such as rent or mortgage payments, food, auto loan payments, insurance and utility bills. What’s left is discretionary income that you could use for Christmas spending.
Once you figure out how much you can afford, make a list of those you will give to and the amounts per person. Take the list with you when you go shopping. If you spend less on one person, you can spend more on another.
Shop for bargains but resist the temptation to spend more than your total, so that you don’t go broke “saving” money.
“And don’t go shopping at the last minute; that causes impulse buying,” Stroth adds.
* Recognize the warning signs of too much debt.
You have no business increasing your borrowing at all if you fit any of the following conditions: your payments are always late and you are constantly receiving collection notices from creditors; you are constantly taking cash advances on your credit card; you are opening up more credit cards just to pay off debts on other cards; you are using savings to pay basic monthly bills such as rent or utilities; your savings total less than three months of after-tax earnings, or you use more than 20% of your take-home pay to pay monthly non-mortgage installment debts such as car payments and credit card bills.
If you meet any of these conditions, it’s time to cut back on your debts--not add to them.
* Reduce your credit card costs.
If you tend to carry an account balance, use bank-issued credit cards such as Visa or MasterCard instead of retailer-issued cards. The average interest rate on bank cards is about 18.7%, compared to 20% and higher for many retailer cards, says Elgie Holstein, director of Bankcard Holders of America, a consumer credit protection group. And by shopping around, you can find bank cards with rates that are lower than average.
On the other hand, if you pay off your accounts in full, use a retail card, Holstein says. They generally don’t charge annual fees.
* Understand the costs of credit card promotions and gimmicks.
Many issuers, for example, offer “skip payment” options where you don’t have to pay every other month. Sounds great. But finance charges will generally continue to accrue during the months you don’t pay, Holstein says. The same is often true of deferred-payment offers where you don’t have to pay for several months.
* Consider alternatives to borrowing and spending.
Use cash. At least you can only spend what you have. Or go on a Christmas savings program. Figure out what you spend on Christmas and make it a point to save a twelfth of that amount each month during the year, Stroth suggests.
Also, the best gifts are not necessarily the most expensive--or ones that you buy. Christmas presents that you make, like baked goods, show thoughtfulness and “can be just as appreciated as any you purchase,” Stroth says.
* Beware of credit scams.
Holidays are heydays for credit scam artists, Holstein says. His suggestions: Offer your credit card for identification but refuse to allow merchants to write your card numbers down on checks; destroy carbons; check billing statements carefully for purchases you did not make or that were never delivered and write your card issuer immediately to dispute such charges; never give your card number over the phone unless you are certain that the company is reputable, and keep your card in view when you give it to sales clerks to prevent them from making extra imprints.
* Know what to do if you get in trouble.
Contact your creditors. They can often help you work out a more manageable repayment schedule.
Alternatively, seek a reputable credit counselor. One of the best services nationwide is run by the nonprofit National Foundation for Consumer Credit. That is the umbrella organization for the Consumer Credit Counseling Service of Los Angeles and similar groups throughout the nation. Among other things, they can help you set up a budget and work out a repayment plan with your creditors.
For an appointment in the Los Angeles area, call (213) 386-7601; in the Riverside-San Bernardino area, (714) 781-0114; Orange County, (714) 547-8281; Ventura County, (805) 644-1500, and San Diego County, (619) 224-2922. For a referral in other areas, call the foundation at (800) 388-CCCS.
